Andurand Sees Record Carbon Heading Even Higher on EU Reforms

Andurand Capital Management, a hedge fund mostly known for its big bets on oil prices, expects the cost of polluting to surge even more in Europe as the region unveils key reforms to its emissions market to meet stricter climate goals.

Next month’s proposed overhaul of the world’s biggest carbon market will help speed up the European Union’s transition to a sustainable economy and could lure more institutional investors, according to Mark Lewis, Andurand’s new head of climate research.

Andurand Sees Record Carbon Heading Even Higher on EU Reforms

On July 14, the European Commission will present a legislative package designed to put the bloc on track to meeting a tougher emissions target for the next decade, affecting every corner of the economy from the carbon market to transport and trade. The measures signal an expected scarcity of pollution permits that’s attracted financial investors and pushed up prices.

“People do not invest on the basis of what they hope will happen,” Lewis said in an interview. “They invest on the basis of the clear policy signals that they’re getting and the implementation of those policies with clear measures. And I think that’s what we’re going to get next month.”

Expectations of the policy tightening have already helped carbon prices double over the past two years to a record 56.90 euros ($68) per metric ton in May. Some hedge funds, including Andurand, have predicted the cost of the pollution rights may surge to 100 euros by the end of this year.

Lewis, who moved from BNP Paribas Asset Management earlier this month, stopped short of providing his own year-end forecast, though he said the price direction is very clear after Europe reached a preliminary deal to make the new emissions-cut target binding. The European Parliament is due to rubber-stamp the Climate Law on Thursday.

While EU companies are paying more to release carbon into the atmosphere, higher costs are needed to encourage industry to be as emissions-efficient as possible.

“There is nobody serious I know who thinks that 50 euros per ton is enough, or anything like enough, to get us to net-zero,” he said. “The sooner the carbon price gets to the levels where meaningful decarbonization is happening in industry the better.”

The expected overhaul of the EU Emissions Trading System will accelerate the pace of pollution cuts for companies, reducing the supply of permits. The 16-year-old market is also poised to expand into new sectors to help the EU meet its 2030 goal to cut greenhouse gases by at least 55% from 1990 levels. The previous goal was a reduction of 40%.

Rebasing

Some investors expect that the Commission may propose a one-time reduction of the total number of emissions permits from 2025 or 2026, a step known as rebasing, according to Lewis. In addition, it will need to increase the rate the overall emissions cap shrinks each year. The steeper the rebasing, the more bullish the reaction will be, Lewis said.

The EU regulator has also signaled that it will seek to limit the amount of allowances that some companies currently get for free. The proposal will need endorsement from the European Parliament and national governments to come into effect. Political negotiations on its final shape may take two years.

“When we see clearly how the cap will be tightened there’s going to be a realization across a large part of European industry that this is now getting very serious,” Lewis said. “That will make industrial companies even less willing to sell any surplus allowances they may have and might well attract a further wave of investors into the market.”

The entry of institutional asset managers, such as pension funds, will be “a big story” for the market in the next couple of years, according to Lewis. Those investors see carbon emerging as an asset class providing hefty returns, a hedge against emissions-intensive assets and a positive environmental impact.

“The beauty of investing in EU carbon allowances as an institutional investor is that the longer you hold them you get the capital appreciation, the hedge and the impact,” Lewis said.

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